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Thursday November 27, 2014

Washington News

Washington Hotline

Tax Extenders – One Year or Permanent?

As the Thanksgiving holiday rapidly approaches, there are significant negotiations underway on the tax extenders bill.

Senate Finance Committee Chairman Ron Wyden (D-OR) presented House Ways and Means Chair Dave Camp (R-MI) with the latest Democratic proposal.

Chairman Camp has openly stated that he would like to make permanent as many of the tax extender provisions as possible. Ways and Means Member David Reichert (R-WA) confirmed that point and noted, “We are looking at permanent extenders for all of the extenders that we passed from the House.”

The House has passed bills with six permanent business and charitable extenders. The business extenders include bonus depreciation, the research and development credit, Section 179 expensing and favorable provisions to minimize capital gain for Subchapter S corporations. The charitable provisions include the IRA charitable rollover, appreciated property gifts from Subchapter S corporations and gifts of apparently wholesome food.

Chairman Wyden presented a proposal to make permanent the enhancements for the earned income tax credit (EITC), the child credit and other tax extenders.

The final negotiations next week are likely to include the leaders of both parties. Senate Democratic Whip Richard Durbin (D-IL) stated, “I would like to see this resolved and make permanent some of these extenders, and I hope we are going to include in that discussion the EITC and childcare tax credit.” Majority Leader Harry Reid (D-NV) told the media that he was open to some permanent extenders. Speaker John Boehner (R-OH) did not comment this week. However, he has previously supported the House bills with the 12 permanent provisions.

Both parties will attempt to reach an agreement during the week of November 24. If the agreement is reached by Thanksgiving, it will be presented to the House and Senate during the first week of December.

Editor’s Note: Senate and House members are showing a sense of urgency in moving forward. The fact that both parties are now proposing permanent status for some preferred tax extenders is quite positive. While Congressional agreement is never certain, the positions of both parties suggest that a compromise agreement on a number of permanent extenders is possible. The question for philanthropy is whether the IRA charitable rollover and other provisions will be passed permanently or for one or two years.

Rep. Paul Ryan Elected Chair of Ways and Means Committee

Following the November elections, the Republican and Democratic caucuses elected their respective leadership. With the majority in the House and Senate, the Republican caucus also elected committee chairmen. On November 18, Rep. Paul Ryan (R-WI) was elected as Chairman of the House Ways and Means Committee. His term will start in January of 2015.

Rep. Kevin Brady (R-TX) was the senior person on the committee and campaigned for the position. However, when Brady determined he did not have sufficient support, he withdrew and Ryan was elected. Ryan published a statement thanking Brady for his “tireless work on behalf of our country.” Ryan also indicated, “We will work together to fix the tax code, hold the IRS accountable, strengthen Medicare and Social Security, repair the safety net and promote job-creating trade agreements.”

Editor’s Note: Ryan and Senate Finance Committee Chairman Orrin Hatch (R-UT) will lead the two taxwriting committees in 2015. The major question is whether the two leaders can move major tax reform forward. Current House Ways and Means Committee Chairman Dave Camp (R-MI) published a 979 page proposed tax reform bill that met with a very cool reception from both parties. All Washington commentators acknowledge that comprehensive tax reform will be quite difficult. A major test for future tax reform will be the current tax extenders negotiation. If both parties agree to make many of the tax extenders permanent, that will be a big step toward facilitating tax reform.

Donees Must Pay Interest In Excess Of Gift Value

In United States v. Elaine T. Marshall et al.; Memo. 12-20804 (10 Nov 2014), the Fifth Circuit held that gift donees are liable for gift tax and interest. The liability exists even if the $75 million total exceeds the value of the original gift.

Decedent J. Howard Marshall sold Marshall Petroleum, Inc. (“MPI”) stock back to his company in 1995 at a bargain price. The sale reduced the total shares outstanding for the company and enhanced the value of the stock held by other parties. The balance of the stock was held by a GRIT for former wife Eleanor, his son E. Pierce Marshall, his daughter-in-law Elaine Marshall and two trusts for grandchildren.

The IRS determined that the bargain price sale created an $81 million indirect gift to the other five shareholders. The IRS assessed a gift tax against the estate following the demise of J. Howard Marshall in 1995. The estate failed to pay the tax.

Subsequently, the estate of son E. Pierce Marshall paid $45 million in tax and interest. This amount equaled the gift value for E. Pierce, wife Elaine and their two children’s trusts. The estate of former wife Eleanor did not pay the tax.

In 2010 the IRS brought an action against the donees to recover the tax plus interest. The District Court determined that the donees were liable for the gift tax plus interest. The IRS also asserted a claim against personal representatives E. Pierce and Finley Hilliard. They paid various accounting fees, legal fees and a charitable set aside without first making payment of gift tax from the estate.

All donees claimed that IRS Sec. 6324(b) limited their obligation for tax plus interest to the value of the indirect gift.

The District Court determined that under Sec. 6324(b) there were obligations for both the donor and the donee. While the liability for the donor was capped at the value of the gift, there was an independent liability for donees. Under Sec. 6901, that liability was personal and therefore the Sec. 6601 interest applied, without limitation. Therefore, the payment by the E. Pierce Marshall estate was not capped at $45 million but could be increased by the amount of interest remaining to be paid to the IRS.

The 5th Circuit affirmed the District Court decision and noted that the legislative history indicated the intention for the donee liability to be subject to interest, without limitation.

Finally, under the federal priority statutes, the payments by E. Pierce Marshall and Hilliard as personal representatives subjected them to personal liability.

Applicable Federal Rate of 2.0% for December -- Rev. Rul. 2014-41: 2014-50 IRB 1 (20 Nov 2014)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2014. The AFR under Section 7520 for the month of December will be 2.0%. The rates for November of 2.2% or October of 2.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2014, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.

Published November 21, 2014

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